Federal Reserve to Markets: You're Too Easy!

As the end of the latest quantitative easing program approached, everyone
was wondering if history would repeat in the form of a stock market correction
that terrified the government into another round of debt monetization. And
right on cue, volatility surged in late September, sending US stocks down by
about 6% by mid-October.

And even that tepid bit of excitement was enough to send the Fed's spinners
into action:

James Bullard, President of the St. Louis Federal Reserve Bank, told Bloomberg
Television's economics editor Michael McKee today that the Fed should consider
delaying the end of QE.

Bullard said, "I also think that inflation expectations are dropping in
the U.S. And that is something that a central bank cannot abide. We have
to make sure that inflation and inflation expectations remain near our target.
And for that reason I think a reasonable response of the Fed in this situation
would be to invoke the clause on the taper that said that the taper was data
dependent. And we could go on pause on the taper at this juncture and wait
until we see how the data shakes out into December. So...continue with QE
at a very low level as we have it right now. And then assess our options
going forward."

That was literally all it took. No concrete action, no pulling out the bazooka,
just some regional Fed chair whom 99.9% of Americans have never heard of speculating
that maybe the end of tapering should be delayed by few months. And the markets
went volatile on the upside, recouping most of the previous couple of weeks'
losses in a few days.

Somewhere out there a bunch of Fed suits are sitting around a conference table
laughing about how easy it is to manipulate today's "investors". After a decade
of artificially-low interest rates, massive debt monetization, trillion-dollar
bank bailouts and who knows what other kinds of secret interventions in what
used to be free markets, the leveraged speculating community no longer cares
about fundamentals. Instead it's all about the flow of newly-created currency
from the world's central banks. When the spigot is on, buy. When it's off,
sell. This has turned out to be one of the easiest periods in financial history
to run money on the "don't fight the Fed" system.

So now what? Another burst of asset price inflation that takes small cap equities
and junk bonds to the moon? Maybe. The new money has to flow somewhere, and
with Europe joining the debt monetization party there might soon be a lot of
money indeed sloshing around a global financial system with relatively few
attractive choices.

But there's a reason that unlimited money creation has never been an easy
path to affluence: It only works for a short while and is inevitably followed
by a period of chaos as all the malinvestment generated when money was too
easy causes various kinds of crises.

In any event, the question that should be on everyone's mind isn't whether
the Fed will keep QE going, but why, after five years of epic debt monetization
and record low interest rates, inflation expectations are, as Ballard notes,
plunging. The Keynesian answer is that $30 trillion (or whatever the true number
turns out to be) wasn't enough. $50 trillion, they assert, would have returned
the world to steady, sustainable growth.

For lack of another politically-marketable policy option, the "more is better" crowd
will get what they want in 2015, when something will happen somewhere to scare
the world's central banks into a coordinated attempt to inflate away their
past mistakes.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.